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Thursday 20 March 2008
Bear Stearns, Jim Cramer, The Federal Reserve, JP Morgan
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The last days of Bear Stearns
It took only a few days, a rising sense of panic - and a critical e-mail - to spell the end of the 85-year-old investment bank.
By Roddy Boyd, writer March 31, 2008
(Fortune Magazine) -- You could detect a trace of fear in his voice. Mostly he seemed stunned. It was March 6, and one of Bear Stearns's top bond executives had dialed me up unprompted. The executive had dished about competitors in the past, but he had never initiated a discussion, much less one about his own firm. Now he explained that financial institutions that he dealt with - firms he had traded with for years - were suddenly asking him whether Bear had the cash to execute their trades.
Such news had yet to surface in the press, but the investment bank's shares had dropped nearly 20% in the previous ten days, and there were murmurs that short-sellers were circling. The executive asked whether I'd heard rumors of trouble, and he tried to preempt them. "We're making money," he said. "Our counterparties are getting paid, trades are clearing, business is picking up. It doesn't seem to be the likely scenario for an investment bank's collapse."
Ten days later Bear Stearns was swallowed by J.P. Morgan Chase. But all the brouhaha over the deal - were the shares worth $2 or $10? should the Federal Reserve have intervened? - has obscured how astonishing Bear's collapse is. It's a reminder that in a business based on confidence, when that confidence evaporates, so does the business. A reconstruction of the week before Bear Stearns agreed to be funded, and then acquired, by J.P. Morgan Chase, reveals the speed at which Bear's longtime customers and counterparties lost their faith in the investment bank and undermined its ability to continue.
It also reveals a psychological gap. Bear had survived one liquidity challenge, in the summer of 2007, when two of its hedge funds cratered after the subprime mortgage collapse. The firm had labored to repair its balance sheet and improve its financing. "Our capital position is strong," said Bear's CFO, Sam Molinaro, at an investors' conference in February. "Balance-sheet liquidity has continued to improve throughout the course of the year. We spent an awful lot of time trying to reduce our higher-risk asset categories."
However much Bear Stearns saw itself as strengthened by its struggles, customers thought otherwise, and that hastened Bear's fall. Molinaro's comments notwithstanding, some had begun inching away months earlier. Bob Sloan, whose S3 Partners finances and advises hedge funds, says he counseled clients last summer to seek other prime brokers because he saw a "30% to 35% chance" that Bear would collapse. By March, Sloan's clients had pulled out $25 billion in assets. Others, of course, would desert only when the panic hit. And a few days would be all it took to show just how shallow the reservoir of trust for the firm was.
MONDAY, MARCH 10: WE DON'T COMMENT ON RUMORS
If there's one thing that companies hate to do, it's comment on rumors. Such statements, the thinking goes, only confer legitimacy on unfounded gossip. But there it was in a Bear press release on March 10: "There is absolutely no truth to the rumors of liquidity problems that circulated today in the market." At that moment, it appeared to be true. The firm had some $17 billion in cash. Of course, Bear was noted for its addiction to leverage even at a time when Wall Street, which runs on debt, was drunk on the stuff. Bear had $11.1 billion in tangible equity capital supporting $395 billion in assets, a leverage ratio of more than 35 to one. And its assets were less liquid than those of many of its competitors.
But by March 10, the problem had metastasized into something more dire than a rumor. Late the preceding Friday, a major bank - accounts differ on which - had rebuffed Bear's request for a short-term $2 billion loan. Such securities-backed repurchase (or "repo") loans are crucial for investment banks, which borrow and lend billions to fund their daily business. Being denied such a loan is the Wall Street equivalent of having your buddy refuse to front you $5 the day before payday. Bear executives scrambled and raised the money elsewhere. But the sign was unmistakable: Credit was drying up.
TUESDAY, MARCH 11: IF I KNEW WHY, I WOULD DO SOMETHING
Confidence continued to ebb, and Bear again tried to reassure investors. "Why is this happening?" CFO Molinaro asked rhetorically on CNBC. "If I knew why it was happening, I would do something to address it." The rumors were "false," he said. "There is no liquidity crisis. No margin calls. It's nonsense."
Still, momentum was turning against the firm. That morning Goldman Sachs's credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn't be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)
"I was astounded when I got the [Goldman] e-mail," says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. "It wasn't," says Bass, who is a former Bear salesman. "Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them."
It was ominous, but it wasn't yet the end. Bear continued absorbing blows. The cost of insuring $10 million in Bear debt via credit default swaps, which had hovered near $350,000 in the month before, shot past $1 million. By the end of March 11, the rate was irrelevant: Banks refused to issue any further credit protection on Bear's debt.
WEDNESDAY, MARCH 12: HOW LIQUID IS BEAR?
When word of the Goldman e-mail leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds.
Dave Hendler, an analyst at research boutique CreditSights, called a Bear contact to find out what was going on. The contact said that all was fine. But then Hendler asked about a $4 billion credit facility due to expire in April. If Bear needed cash, Hendler reckoned, that was probably more than enough. Hendler says he was told that the facility had actually expired in February and several banks had backed out, reducing the credit line to $2.8 billion. Bear, he was told, was waiting until the release of its quarterly earnings to reveal the status of the loan. Neither Bear's liquidity nor its lenders' confidence, it appeared, was what it had seemed. (A firm spokesman declined to comment.)
Bear continued to maintain publicly that all was well. This time it was CEO Alan Schwartz - who hadn't seen the need to return to headquarters, and conducted the interview from Palm Beach - who went on CNBC. "We're not being made aware of anybody who is not taking our credit as a counterparty," he said, adding, "We don't see any pressure on our liquidity, let alone a liquidity crisis."
THURSDAY, MARCH 13: CALL JAMIE DIMON
By March 13, the gravity of the situation had finally registered at Bear. Schwartz returned to New York and convened a meeting of the top leadership. Liquidity was plummeting; according to published reports, it had fallen to $2 billion at week's end. Desperate, Schwartz contacted J.P. Morgan CEO Jamie Dimon that evening.
Even as the firm frantically negotiated a rescue package, Bear executives continued to try to convince the world that everything was under control. That evening Schwartz contacted a well-known New York hedge fund manager (a longtime Bear prime brokerage client). He pleaded with the manager to appear on CNBC the next morning and express his confidence in Bear. The hedge fund manager declined politely but wondered why Bear needed a client to convince the world of its health. He wouldn't wonder long.
FRIDAY, MARCH 14: IT'S ALL GONE NOW
AT 9 A.M., Bear announced $30 billion in funding provided by J.P. Morgan and backstopped by the government. In a conference call Schwartz sounded as if he was still fighting reality. "Bear Stearns has been subject to a significant amount of rumor," he explained. "We attempted to try to provide some facts to the situation, but ... the rumors intensified." He said customer requests to cash out "accelerated yesterday ... [and] at the pace things were going, there could be continued liquidity demands that would outstrip our liquidity resources." The new loan facility, he said, would restore calm.
Of course, that didn't pan out. Bear's stock dropped nearly 40% in the first half-hour of trading. Within days, Bear's 85 years as an independent entity were at an end.
At Maggie's bar that Friday evening, directly across from Bear headquarters on 47th Street, the sense of shock was complete. A crowd of frazzled Bear employees thronged the bar. Some traders, clearly well past their first round at 6 P.M., expressed amazement at having to navigate camera crews to cross the street to the bar.
Soon after, I happened to sit next to a Bear Stearns managing director on the 6:35 express from Grand Central Station to Greenwich, Conn. "I worked eight years at a firm that promoted me from the back office to investment banking," he told me as he sipped a Budweiser tall boy. "I had thousands of shares and thought I could afford to send my kids to private schools and college. It's all gone now. I think I'll probably move to Pittsburgh, see if the Federal Home Loan Bank needs anybody."
REPORTER ASSOCIATE Doris Burke contributed to this article.
The Money Masters - How International Bankers Gained Control of America
3 hr 35 min 19 sec - Mar 27, 2007 newstree.org
"The powers of financial capitalism had a far-reaching plan, nothing less than to create a world system of financial control in private ... all » hands able to dominate the political system of each country and the economy of the world as a whole...Their secret is that they have annexed from governments, monarchies, and republics the power to create the world's money..."
THE MONEY MASTERS is a 3 1/2 hour non-fiction, historical documentary that traces the origins of the political power structure that rules our nation and the world today. The modern political power structure has its roots in the hidden manipulation and accumulation of gold and other forms of money. The development of fractional reserve banking practices in the 17th century brought to a cunning sophistication the secret techniques initially used by goldsmiths fraudulently to accumulate wealth. With the formation of the privately-owned Bank of England in 1694, the yoke of economic slavery to a privately-owned "central" bank was first forced upon the backs of an entire nation, not removed but only made heavier with the passing of the three centuries to our day. Nation after nation, including America, has fallen prey to this cabal of international central bankers.
Segments:
The Problem; The Money Changers; Roman Empire; The Goldsmiths of Medieval England; Tally Sticks; The Bank of England; The Rise of the Rothschilds; The American Revolution; The Bank of North America; The Constitutional Convention; First Bank of the U.S.; Napoleon's Rise to Power; Death of the First Bank of the U.S. / War of 1812; Waterloo; Second Bank of the U.S.; Andrew Jackson; Fort Knox; World Central Bank; Loose Change 911 truth police state globalists NWO New World Order Federal Reserve Alex Jones Aaron Russo America From Freedom To Fascism zionist IMF BIS John Perkins 911 911 Globalism bilderberg Rothschild Rockefeller Schiff Warburg illuminati bohemian grove idi amin freemason
Bear Stearns got $US3bn offer a day before JPMorgan sale
April 12, 2008
J.C. Flowers & Co offered to pay $US3 billion ($3.2 billion) for a 90% equity stake in Bear Stearns one day before JPMorgan Chase & Co. agreed to buy the securities firm for about $US240 million.
The March 15 proposal from Flowers, the private equity firm founded by former Goldman Sachs Group banker J. Christopher Flowers, fell apart the next day when his company failed to get bank financing for the deal and backing from the Federal Reserve, according a regulatory filing from JPMorgan on Friday.
The filing refers to Flowers as "Bidder A.'' Two people with knowledge of the transaction confirmed that Flowers's firm was the bidder. He didn't return a phone call seeking comment.
Bear Stearns, once the fifth-biggest U.S. securities firm, was forced to sell itself to JPMorgan on March 16 after customers and lenders fled because of speculation that the company faced a cash shortage.
JPMorgan, which got financial support from the Fed for the takeover, raised the purchase price from $US2 a share to $US10 a share in stock a week later to quell concerns that Bear Stearns shareholders would reject the deal. The stock peaked at $US171.50 last year.
"Bear Stearns and its board of directors were faced with a rapidly narrowing set of alternatives,'' Bear Stearns financial adviser Lazard said in the filing. Without a buyer, the firm would have been forced to declare bankruptcy, Lazard said.
JPMorgan and Flowers, both based in New York, are the only companies described as bidders in Friday's filing, which details Bear Stearns's efforts to negotiate a sale on Saturday, March 15, and Sunday, March 16.
The Flowers offer would have required Bear Stearns to issue new stock in exchange for the $US3 billion cash infusion, diluting existing Bear Stearns shares, which closed at $US30 on March 14.
Not budging
JPMorgan, led by chief executive Jamie Dimon, told Bear Stearns on March 15 that the bank was prepared to bid between $US8 and $US12 a share in stock, and then lowered that offer the next day to $US4, and finally to $US2, according to the filing.
When Bear Stearns "registered its objection'' to the reduced offer, JPMorgan replied that after ``discussions with government officials, it was unwilling to increase the $US2 per share merger consideration,'' the filing says.
Bear Stearns agreed to the $US2 figure later that day.
Treasury Department officials, who conferred with Fed counterparts during the talks, recommended a "low-end'' price for the acquisition, Treasury Undersecretary Robert Steel said at an April 3 Congressional hearing.
"There was a view that the price should not be very high, or should be towards the low end'' because of the government's involvement and risk of moral hazard, or protecting those who took excessive risks, Steel said.
Moody's downgrade
Bear Stearns customers began fleeing in early March, after Moody's Investors Service downgraded some mortgage securities issued by the New York-based firm and "rumours began to circulate in the market that there were significant liquidity problems at Bear Stearns itself,'' JPMorgan said.
During the week of March 10, Bear Stearns estimated that its pool of cash and easy-to-sell assets dwindled to about $US4.8 billion from $US18.3 billion. It anticipated needing $US60 billion to $US100 billion on March 17 to pay counterparties.
As of March 21, five days after striking the original JPMorgan deal, Bear Stearns had borrowed $US32.5 billion from the New York Federal Reserve Bank and another $US13.4 billion from JPMorgan.
The New York Fed set up an overnight-loan mechanism for government bond dealers after JPMorgan stepped in to buy Bear Stearns on March 16.
Fed chairman Ben Bernanke said on April 3 that the primary dealer facility was put in place to prevent a run on other brokers, and said it would have to be closed once the emergency conditions in markets subsided.
(RTTNews) - Troubled investment bank Bear Stearns Companies Inc., which last month signed an agreement to be acquired by JPMorgan Chase & Co., on Monday said in a regulatory filing that first quarter profit plunged 79% from the year-ago quarter, along with a 40% decline in revenues.
The company's net income plunged to $115 million or 86 cents per share from $554 million or $3.82 per share in the year-ago period.
Revenues for the quarter declined to $1.479 billion from $2.482 billion. Commission revenues, including institutional, clearance and retail, rose to $330 million from $281 million.
The company said: "Continuation of the global liquidity crisis coupled with a further repricing of credit risk created a difficult operating environment during the company's quarter ended February 29, 2008. Weakness in the Company's fixed income, investment banking and asset management businesses more than offset a record quarter for the Company's institutional equities and strong results for the Private Client Services business."
Fixed income revenue plummeted 94% from last year to $66 million. Investment banking dropped to $230 million from $350 million firm wide, while it dropped to $159 million in capital markets group. Equities sales and trading income jumped 58% to $811 million. The company recognized $0.6 billion in net inventory markdowns during the quarter.
The company said net revenues from the international activities increased by 50% to $671 million in the 2008 quarter from $448 million in the 2007 quarter.
Income before provision for income taxes declined to $153 million from $835 million. Pre-tax profit margins decreased to 10.3%, compared to 33.7% in the same quarter in 2007. Annualized return on average common equity was 4.2% for the quarter ended February 29, 2008 compared to 18.3% in the 2007 quarter.
Results included about $600 million of write-downs associated with mortgages and leveraged finance. The firm reported its first loss as a public company in the fourth quarter on write-downs for sub prime mortgage holdings and declines in its three largest divisions, including fixed income.
Bear Stearns' net loss for the fourth quarter was $854 million, compared to a net income of $563 million in the fourth quarter of 2006. Net loss applicable to common shares came in at $859 million, or $6.90 per share, in comparison with a net income of $558 million, or $4.00 per share, a year ago. Quarterly net revenues were a negative $379 million, compared to revenues of $2.41 billion in the prior-year quarter.
Bear Stearns said on Monday that it received a Wells notice from the Securities and Exchange Commission, which said the agency investigators were prepared to recommend enforcement action against the company as part of a municipal-bond probe. The company said it was cooperating with the SEC and the Department of Justice.
The impact of sub prime crisis has been severest for Bear Stearns, an 84-year-old company that generates nearly one-sixth of its income from packaging and trading mortgage bonds. In last July, two of the company's hedge funds that had invested in mortgage securities failed, triggering a collapse of the sub-prime home loan market. The two funds later filed for bankruptcy protection and the assets of a third fund were frozen by Bear Stearns. On Friday, the company said its assets under management have shrunk 20% since last November.
On March 14, the stock of the struggling investment bank dropped 53% in morning trading after JP Morgan said that in conjunction with the Federal Reserve Bank of New York, it has agreed to provide a secured loan facility to Bear Stearns for an initial period of up to 28 days. Announcement of the bailout sent the shares of many other financial institutions also down and took the dollar to new lows. Two days later, on March 16, JPMorgan Chase, backed by the federal government, said it would acquire Bear Stearns for $236.2 million or $2.00 per share to avoid a bankruptcy. The purchase price was later increased to $10.00 per share.
Stock Movement
BSC closed Monday's regular trade at $10.11, down $0.11 or 1.08% from the previous close, on 14.54 million shares. In the extended session, the stock dropped two cents. For the past year, the stock has been trending in the range of $2.84-$159.36.
SEC rebuffs lawmakers over Bear Stearns disclosure
23 Apr 2008
The Securities and Exchange Commission refused a congressional request to disclose why it dropped an investigation into whether Bear Stearns harmed investors by improperly valuing complex debt securities.
The US regulator cited confidentiality in its decision involving the late-stage probe of the Wall Street firm. At issue is a move by the SEC to abort an enforcement case into activities at Bear several months before the firm imploded last month.
Investigators including the SEC had pulled back from bringing two cases begun in 2005 against Bear Stearns involving collateralised debt obligations. In an April 2 letter, Senator Charles Grassley, ranking member of the Senate Finance Committee, requested information from the SEC into the circumstances surrounding the dropped case.
Replying to Grassley, SEC chairman Christopher Cox wrote in an April 16 letter: “The commission does not disclose the existence or non-existence of an investigation or information generated in any investigation unless made a matter of public record in proceedings brought before the Commission or the courts."
Junk and chumps, pump and dump, barbarians and brokers, smoke and mirrors and other assets of our risk-positive fiscal mess
By John Sakowicz 04.23.08
This is the first of a multipart series on the state of the economy and how we got here.
There is no glory on Wall Street. There is only greed. There are no good guys or bad guys. There are only winners and losers. In fact, there are only guys like Steve Schwarzman and Pete Peterson.
In 1984, Schwarzman and Peterson got crushed like a couple of grapes under the very chubby feet of a guy named Lew Glucksman. (Everything about Lew was chubby, not just his feet.) This happened at a place called Lehman Brothers, at that time a venerable Wall Street partnership. It was a classic power struggle, but no biggie in the whole scheme of things.
Schwarzman and Peterson bounced back quickly. In 1985, they started a new firm with a shared secretary and $400,000. Their new company was called the Blackstone Group, and it is the stuff of legend to say that fortune smiled on them. Schwarzman and Peterson are now two of the richest men in the world. Since 1985, they've done over $400 billion in deals. They are arguably the leading global alternative-asset managers in the world. What's more, they invented an entirely new financial world while they did it.
Problem is, we have to live in it.
Problem Swallowing
Problem is, there are lots of problems on Wall Street. For starters, we've seen the consolidation of power and the concentration of both capital and revenue in fewer and fewer hands. The few institutions left on Wall Street—and there about 10—are now like superstores or warehouses. And the story of how they came to dominate Wall Street is very much like the story of how Costco or Sam's Club came to push mom and pop retailers off the map.
I would know. I started my career at Alex Brown & Sons, the oldest investment bank in the country, established in 1800. A guy named A. B. "Buzzy" Krongard hired me. (Buzzy later turned out to be the No. 3 guy in the CIA.) Alas, in the decade of the 1990s, the proud people at Alex Brown got swallowed up by Bankers Trust, which in turn got swallowed up by Deutsche Bank. I also worked for Colonial Management Associates, which got swallowed up by Columbia Management Group, which got swallowed up by FleetBoston, which got swallowed up by Bank of America.
I worked on the floor of the NYSE for Spear, Leeds & Kellogg, which was swallowed up by Goldman Sachs. I worked for Dean Witter, which got swallowed up by Morgan Stanley. None of the firms I worked for were small companies, what we on Wall Street quaintly call "boutiques." I worked for big companies. Yet they've all been swallowed. All of them.
Now, the 10 or so institutions that dominate Wall Street are monopolies. We've also seen the reinvention of these very same companies on Wall Street. There is now no difference between a commercial bank and an investment bank, no difference between a lender and an adviser. There is now only the monolithic Merrill Lynch or the monolithic Citigroup. Capital is concentrated in these few firms. Naturally, so are revenues. But risk, too, is concentrated. This is a big problem. Because if every deal has got to be bigger and bigger to earn fatter and fatter rewards, then these few institutions must assume greater and greater risk. And risk management is what making money is all about.
Prime Junk Chumps
The Glass-Steagall Act, enacted during the Great Depression to prevent another stock market crash by separating commercial banking from investment banking, was repealed in 1999. In today's lineup of traders, deal makers, underwriters, lenders, advisers, market makers, portfolio managers, brokers and others, it is impossible to point to the chief suspect in the defrauding of America that is now being commonly called the "subprime crisis."
The traditional institutions of commercial banks and investment banks have given way to a new set called hedge funds, private equity funds, and other alternative asset managers. Emphasis on "alternative." Schwarzman and Peterson saw the trend; this was their genius. But there is little to no regulation of alternative-asset managers.
Which brings us to the next problem: There is little to no regulation of the alternative assets that these alternative-asset managers dream up and manage.
A lot of this stuff is debt—debt that is diced, spliced, altered, reheated, topped off with nuts, whipped cream and a cherry and then packaged and repackaged to the American investor. This debt is sold not directly to the little guy, the retail investor—you and me—but to the institutional investor who is presumably acting on our behalf through pension funds, insurance companies, mutual funds, endowments and others.
In the parlance of Wall Street, this debt is "securitized." Call this debt by any name, but don't call it secure. The popular names for this debt are collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs), first widely heard last summer when the subprime market was blowing up. These CMOs and CDOs are spread across the spectrum of risk. Some are senior debt. Some are subordinated debt. Some are OK. The rest are junk. Junk as in subprime junk.
Guess who owns that debt now? You do. Through your pension plans, insurance policies, mutual funds, university and hospital endowments—you do, we do, I do.
And ever since the Federal Reserve Bank bailed out Bear Stearns, you now also own this debt as an American taxpayer. Yeah, chump, you. The losses—er, liabilities—were shifted to you.
There's more. The Fed now lends money—our taxpayer money—to all of Wall Street. The Fed lends not just to its member banks, like before the subprime mess, but it now also lends to all those reckless broker dealers out there, firms like Bear Stearns. The Fed lends your money to them through something that is called the "discount window."
And, man, is that money discounted! The Fed is giving it away. As of this writing, borrowing from the discount window hit something like $36.2 billion a day. A day.
Impossible Things
In Alice in Wonderland, the Queen says, "I believe in as many as six impossible things before breakfast."
Within the last decade, a thousand impossible things are dreamed up before dawn. Not only is there the packaging of new forms of debt, but the minting of new forms of money. Literally, new forms of money: they're called swaps and derivatives.
Swaps and derivatives trade like stocks and bonds, but most of them aren't registered securities like stocks or bonds. But swaps and derivatives aren't exactly Monopoly money, either. What are they? Ridiculously complex and esoteric. For the last decade, risk managers on Wall Street pulled their hair out, lost sleep and finally gave up trying to quantify the risk inherent in them. Yeah, they've given up. When it came to swaps and derivatives, even auditors couldn't find their ass with both hands.
And yet trillions of dollars in swaps and derivatives trade every single day in markets that didn't even exist a decade ago. For the most part, the biggest volume of swaps and derivatives don't even trade in a physical marketplace like the exchanges in New York or Chicago. The transactions are opaque because they are largely undertaken by private parties in electronic markets, most of them offshore.
Swaps and derivatives trade in a virtual market, a shadow market. A market that in the United States alone is estimated to be a $45.5 trillion market.
Here's the perspective: The size of the worldwide bond market is estimated at $45 trillion. The size of the worldwide stock market is estimated at $51 trillion. And the size of the worldwide swaps and derivatives market is estimated at $480 trillion in nominal or "face" value. That's 30 times the size of the entire U.S. economy and 12 times the size of the entire world economy.
Brokers & Barbarians
How is this possible? Advanced technologies make this market possible. Welcome to money's alternative universe. Alternative trading systems. Electronic communications networks. Central banks. Private banks. Brass plate banks. Russian Mafia banks in Cyprus. The Vatican's bank in the Cayman Islands. The Bush and bin Laden families holding hands and tip-toeing through the tulips in financial cyberspace. Digital barrels of oil in virtual supertankers in the Persian Gulf. Digital ounces of gold in virtual vaults in Switzerland. Digital bushels of corn in virtual silos in Iowa. Eurex. Euronext. The World Federation of Exchanges. A transnational community of anonymous traders who have never met and never will.
Merrill Lynch trading swaps and derivatives with Iran. Mullahs on the mainframe. Citigroup trading swaps and derivatives with Venezuela. Chavez on the craps table. UBS trading swaps and derivatives with almost anyone out there in the ethers—Christ, the anti-Christ—it doesn't matter to UBS. What matters is that traders keep liquidity coming out the yin-yang.
We've seen the emergence of a new master race on Wall Street who work hand in hand with the traders. They created this market of swaps and derivatives, and help traders manipulate this market through their own brand of highly sophisticated pump-and-dump schemes and do their damned best to keep this market secret and off the books. These are the prime brokers.
Not in keeping with their other brethren on Wall Street, either short-term traders or long-term bankers, prime brokers are the new barbarians at the gate. They augment the activities of the hedge-fund guys and private-equity guys—and then take the game to a whole other level.
Believe me when I say their interests are not aligned with your interests.
At press time, oil nears a record $117 a barrel. The dollar continues to fall. Our credit woes continue to worsen. The United States is deep in debt and still digging. We're all paying for the nation's debt addiction through both direct and indirect taxes. Our leaders, such as they are, are tracking the storm of inflation and the threat of the most serious recession since the Great Depression. Still think this doesn't have anything to do with you?
Next: Where has that Black Swan been hiding?
John Sakowicz is a Sonoma County investor who was a cofounder of a multibillion-dollar offshore hedge fund, Battle Mountain Research Group. He was assisted in research by Arianna Carisella.
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The last days of Bear Stearns
It took only a few days, a rising sense of panic - and a critical e-mail - to spell the end of the 85-year-old investment bank.
By Roddy Boyd, writer
March 31, 2008
(Fortune Magazine) -- You could detect a trace of fear in his voice. Mostly he seemed stunned. It was March 6, and one of Bear Stearns's top bond executives had dialed me up unprompted. The executive had dished about competitors in the past, but he had never initiated a discussion, much less one about his own firm. Now he explained that financial institutions that he dealt with - firms he had traded with for years - were suddenly asking him whether Bear had the cash to execute their trades.
Such news had yet to surface in the press, but the investment bank's shares had dropped nearly 20% in the previous ten days, and there were murmurs that short-sellers were circling. The executive asked whether I'd heard rumors of trouble, and he tried to preempt them. "We're making money," he said. "Our counterparties are getting paid, trades are clearing, business is picking up. It doesn't seem to be the likely scenario for an investment bank's collapse."
Ten days later Bear Stearns was swallowed by J.P. Morgan Chase. But all the brouhaha over the deal - were the shares worth $2 or $10? should the Federal Reserve have intervened? - has obscured how astonishing Bear's collapse is. It's a reminder that in a business based on confidence, when that confidence evaporates, so does the business. A reconstruction of the week before Bear Stearns agreed to be funded, and then acquired, by J.P. Morgan Chase, reveals the speed at which Bear's longtime customers and counterparties lost their faith in the investment bank and undermined its ability to continue.
It also reveals a psychological gap. Bear had survived one liquidity challenge, in the summer of 2007, when two of its hedge funds cratered after the subprime mortgage collapse. The firm had labored to repair its balance sheet and improve its financing. "Our capital position is strong," said Bear's CFO, Sam Molinaro, at an investors' conference in February. "Balance-sheet liquidity has continued to improve throughout the course of the year. We spent an awful lot of time trying to reduce our higher-risk asset categories."
However much Bear Stearns saw itself as strengthened by its struggles, customers thought otherwise, and that hastened Bear's fall. Molinaro's comments notwithstanding, some had begun inching away months earlier. Bob Sloan, whose S3 Partners finances and advises hedge funds, says he counseled clients last summer to seek other prime brokers because he saw a "30% to 35% chance" that Bear would collapse. By March, Sloan's clients had pulled out $25 billion in assets. Others, of course, would desert only when the panic hit. And a few days would be all it took to show just how shallow the reservoir of trust for the firm was.
MONDAY, MARCH 10: WE DON'T COMMENT ON RUMORS
If there's one thing that companies hate to do, it's comment on rumors. Such statements, the thinking goes, only confer legitimacy on unfounded gossip. But there it was in a Bear press release on March 10: "There is absolutely no truth to the rumors of liquidity problems that circulated today in the market." At that moment, it appeared to be true. The firm had some $17 billion in cash. Of course, Bear was noted for its addiction to leverage even at a time when Wall Street, which runs on debt, was drunk on the stuff. Bear had $11.1 billion in tangible equity capital supporting $395 billion in assets, a leverage ratio of more than 35 to one. And its assets were less liquid than those of many of its competitors.
But by March 10, the problem had metastasized into something more dire than a rumor. Late the preceding Friday, a major bank - accounts differ on which - had rebuffed Bear's request for a short-term $2 billion loan. Such securities-backed repurchase (or "repo") loans are crucial for investment banks, which borrow and lend billions to fund their daily business. Being denied such a loan is the Wall Street equivalent of having your buddy refuse to front you $5 the day before payday. Bear executives scrambled and raised the money elsewhere. But the sign was unmistakable: Credit was drying up.
TUESDAY, MARCH 11: IF I KNEW WHY, I WOULD DO SOMETHING
Confidence continued to ebb, and Bear again tried to reassure investors. "Why is this happening?" CFO Molinaro asked rhetorically on CNBC. "If I knew why it was happening, I would do something to address it." The rumors were "false," he said. "There is no liquidity crisis. No margin calls. It's nonsense."
Still, momentum was turning against the firm. That morning Goldman Sachs's credit derivatives group sent its hedge fund clients an e-mail announcing another blow. In previous weeks, banks such as Goldman had done a brisk business (for a handsome fee, of course) agreeing to stand in for institutions nervous, say, that Bear wouldn't be able to cough up its obligations on an interest rate swap. But on March 11, Goldman told clients it would no longer step in for them on Bear derivatives deals. (A Goldman spokesman asserts that the e-mail was not a categorical refusal.)
"I was astounded when I got the [Goldman] e-mail," says Kyle Bass of Hayman Capital. He had a colleague call Goldman to see if it was a mistake. "It wasn't," says Bass, who is a former Bear salesman. "Goldman told Wall Street that they were done with Bear, that there was [effectively] too much risk. That was the end for them."
It was ominous, but it wasn't yet the end. Bear continued absorbing blows. The cost of insuring $10 million in Bear debt via credit default swaps, which had hovered near $350,000 in the month before, shot past $1 million. By the end of March 11, the rate was irrelevant: Banks refused to issue any further credit protection on Bear's debt.
WEDNESDAY, MARCH 12: HOW LIQUID IS BEAR?
When word of the Goldman e-mail leaked out, the floodgates opened. Hedge funds and other clients, eventually running into the hundreds, began yanking their funds.
Dave Hendler, an analyst at research boutique CreditSights, called a Bear contact to find out what was going on. The contact said that all was fine. But then Hendler asked about a $4 billion credit facility due to expire in April. If Bear needed cash, Hendler reckoned, that was probably more than enough. Hendler says he was told that the facility had actually expired in February and several banks had backed out, reducing the credit line to $2.8 billion. Bear, he was told, was waiting until the release of its quarterly earnings to reveal the status of the loan. Neither Bear's liquidity nor its lenders' confidence, it appeared, was what it had seemed. (A firm spokesman declined to comment.)
Bear continued to maintain publicly that all was well. This time it was CEO Alan Schwartz - who hadn't seen the need to return to headquarters, and conducted the interview from Palm Beach - who went on CNBC. "We're not being made aware of anybody who is not taking our credit as a counterparty," he said, adding, "We don't see any pressure on our liquidity, let alone a liquidity crisis."
THURSDAY, MARCH 13: CALL JAMIE DIMON
By March 13, the gravity of the situation had finally registered at Bear. Schwartz returned to New York and convened a meeting of the top leadership. Liquidity was plummeting; according to published reports, it had fallen to $2 billion at week's end. Desperate, Schwartz contacted J.P. Morgan CEO Jamie Dimon that evening.
Even as the firm frantically negotiated a rescue package, Bear executives continued to try to convince the world that everything was under control. That evening Schwartz contacted a well-known New York hedge fund manager (a longtime Bear prime brokerage client). He pleaded with the manager to appear on CNBC the next morning and express his confidence in Bear. The hedge fund manager declined politely but wondered why Bear needed a client to convince the world of its health. He wouldn't wonder long.
FRIDAY, MARCH 14: IT'S ALL GONE NOW
AT 9 A.M., Bear announced $30 billion in funding provided by J.P. Morgan and backstopped by the government. In a conference call Schwartz sounded as if he was still fighting reality. "Bear Stearns has been subject to a significant amount of rumor," he explained. "We attempted to try to provide some facts to the situation, but ... the rumors intensified." He said customer requests to cash out "accelerated yesterday ... [and] at the pace things were going, there could be continued liquidity demands that would outstrip our liquidity resources." The new loan facility, he said, would restore calm.
Of course, that didn't pan out. Bear's stock dropped nearly 40% in the first half-hour of trading. Within days, Bear's 85 years as an independent entity were at an end.
At Maggie's bar that Friday evening, directly across from Bear headquarters on 47th Street, the sense of shock was complete. A crowd of frazzled Bear employees thronged the bar. Some traders, clearly well past their first round at 6 P.M., expressed amazement at having to navigate camera crews to cross the street to the bar.
Soon after, I happened to sit next to a Bear Stearns managing director on the 6:35 express from Grand Central Station to Greenwich, Conn. "I worked eight years at a firm that promoted me from the back office to investment banking," he told me as he sipped a Budweiser tall boy. "I had thousands of shares and thought I could afford to send my kids to private schools and college. It's all gone now. I think I'll probably move to Pittsburgh, see if the Federal Home Loan Bank needs anybody."
REPORTER ASSOCIATE Doris Burke contributed to this article.
The Money Masters - How International Bankers Gained Control of America
3 hr 35 min 19 sec - Mar 27, 2007
newstree.org
"The powers of financial capitalism had a far-reaching plan, nothing less than to create a world system of financial control in private ... all » hands able to dominate the political system of each country and the economy of the world as a whole...Their secret is that they have annexed from governments, monarchies, and republics the power to create the world's money..."
THE MONEY MASTERS is a 3 1/2 hour non-fiction, historical documentary that traces the origins of the political power structure that rules our nation and the world today. The modern political power structure has its roots in the hidden manipulation and accumulation of gold and other forms of money. The development of fractional reserve banking practices in the 17th century brought to a cunning sophistication the secret techniques initially used by goldsmiths fraudulently to accumulate wealth. With the formation of the privately-owned Bank of England in 1694, the yoke of economic slavery to a privately-owned "central" bank was first forced upon the backs of an entire nation, not removed but only made heavier with the passing of the three centuries to our day. Nation after nation, including America, has fallen prey to this cabal of international central bankers.
Segments:
The Problem;
The Money Changers;
Roman Empire;
The Goldsmiths of Medieval England;
Tally Sticks;
The Bank of England;
The Rise of the Rothschilds;
The American Revolution;
The Bank of North America;
The Constitutional Convention; First Bank of the U.S.;
Napoleon's Rise to Power;
Death of the First Bank of the U.S. / War of 1812;
Waterloo;
Second Bank of the U.S.;
Andrew Jackson;
Fort Knox;
World Central Bank;
Loose Change 911 truth police state globalists NWO New World Order Federal Reserve Alex Jones Aaron Russo America From Freedom To Fascism zionist IMF BIS John Perkins 911 911 Globalism bilderberg Rothschild Rockefeller Schiff Warburg illuminati bohemian grove idi amin freemason
Mr Mortgage Exposes Lehman ALT-A Mortgages in detail
Posted Wed, April 9, 2008
Bear Stearns got $US3bn offer a day before JPMorgan sale
April 12, 2008
J.C. Flowers & Co offered to pay $US3 billion ($3.2 billion) for a 90% equity stake in Bear Stearns one day before JPMorgan Chase & Co. agreed to buy the securities firm for about $US240 million.
The March 15 proposal from Flowers, the private equity firm founded by former Goldman Sachs Group banker J. Christopher Flowers, fell apart the next day when his company failed to get bank financing for the deal and backing from the Federal Reserve, according a regulatory filing from JPMorgan on Friday.
The filing refers to Flowers as "Bidder A.'' Two people with knowledge of the transaction confirmed that Flowers's firm was the bidder. He didn't return a phone call seeking comment.
Bear Stearns, once the fifth-biggest U.S. securities firm, was forced to sell itself to JPMorgan on March 16 after customers and lenders fled because of speculation that the company faced a cash shortage.
JPMorgan, which got financial support from the Fed for the takeover, raised the purchase price from $US2 a share to $US10 a share in stock a week later to quell concerns that Bear Stearns shareholders would reject the deal. The stock peaked at $US171.50 last year.
"Bear Stearns and its board of directors were faced with a rapidly narrowing set of alternatives,'' Bear Stearns financial adviser Lazard said in the filing. Without a buyer, the firm would have been forced to declare bankruptcy, Lazard said.
JPMorgan and Flowers, both based in New York, are the only companies described as bidders in Friday's filing, which details Bear Stearns's efforts to negotiate a sale on Saturday, March 15, and Sunday, March 16.
The Flowers offer would have required Bear Stearns to issue new stock in exchange for the $US3 billion cash infusion, diluting existing Bear Stearns shares, which closed at $US30 on March 14.
Not budging
JPMorgan, led by chief executive Jamie Dimon, told Bear Stearns on March 15 that the bank was prepared to bid between $US8 and $US12 a share in stock, and then lowered that offer the next day to $US4, and finally to $US2, according to the filing.
When Bear Stearns "registered its objection'' to the reduced offer, JPMorgan replied that after ``discussions with government officials, it was unwilling to increase the $US2 per share merger consideration,'' the filing says.
Bear Stearns agreed to the $US2 figure later that day.
Treasury Department officials, who conferred with Fed counterparts during the talks, recommended a "low-end'' price for the acquisition, Treasury Undersecretary Robert Steel said at an April 3 Congressional hearing.
"There was a view that the price should not be very high, or should be towards the low end'' because of the government's involvement and risk of moral hazard, or protecting those who took excessive risks, Steel said.
Moody's downgrade
Bear Stearns customers began fleeing in early March, after Moody's Investors Service downgraded some mortgage securities issued by the New York-based firm and "rumours began to circulate in the market that there were significant liquidity problems at Bear Stearns itself,'' JPMorgan said.
During the week of March 10, Bear Stearns estimated that its pool of cash and easy-to-sell assets dwindled to about $US4.8 billion from $US18.3 billion. It anticipated needing $US60 billion to $US100 billion on March 17 to pay counterparties.
As of March 21, five days after striking the original JPMorgan deal, Bear Stearns had borrowed $US32.5 billion from the New York Federal Reserve Bank and another $US13.4 billion from JPMorgan.
The New York Fed set up an overnight-loan mechanism for government bond dealers after JPMorgan stepped in to buy Bear Stearns on March 16.
Fed chairman Ben Bernanke said on April 3 that the primary dealer facility was put in place to prevent a run on other brokers, and said it would have to be closed once the emergency conditions in markets subsided.
Posted Saturday, April 12, 2008
Bear Stearns Q1 Profit Plunges 79%
April 14, 2008
(RTTNews) - Troubled investment bank Bear Stearns Companies Inc., which last month signed an agreement to be acquired by JPMorgan Chase & Co., on Monday said in a regulatory filing that first quarter profit plunged 79% from the year-ago quarter, along with a 40% decline in revenues.
The company's net income plunged to $115 million or 86 cents per share from $554 million or $3.82 per share in the year-ago period.
Revenues for the quarter declined to $1.479 billion from $2.482 billion. Commission revenues, including institutional, clearance and retail, rose to $330 million from $281 million.
The company said: "Continuation of the global liquidity crisis coupled with a further repricing of credit risk created a difficult operating environment during the company's quarter ended February 29, 2008. Weakness in the Company's fixed income, investment banking and asset management businesses more than offset a record quarter for the Company's institutional equities and strong results for the Private Client Services business."
Fixed income revenue plummeted 94% from last year to $66 million. Investment banking dropped to $230 million from $350 million firm wide, while it dropped to $159 million in capital markets group. Equities sales and trading income jumped 58% to $811 million. The company recognized $0.6 billion in net inventory markdowns during the quarter.
The company said net revenues from the international activities increased by 50% to $671 million in the 2008 quarter from $448 million in the 2007 quarter.
Income before provision for income taxes declined to $153 million from $835 million. Pre-tax profit margins decreased to 10.3%, compared to 33.7% in the same quarter in 2007. Annualized return on average common equity was 4.2% for the quarter ended February 29, 2008 compared to 18.3% in the 2007 quarter.
Results included about $600 million of write-downs associated with mortgages and leveraged finance. The firm reported its first loss as a public company in the fourth quarter on write-downs for sub prime mortgage holdings and declines in its three largest divisions, including fixed income.
Bear Stearns' net loss for the fourth quarter was $854 million, compared to a net income of $563 million in the fourth quarter of 2006. Net loss applicable to common shares came in at $859 million, or $6.90 per share, in comparison with a net income of $558 million, or $4.00 per share, a year ago. Quarterly net revenues were a negative $379 million, compared to revenues of $2.41 billion in the prior-year quarter.
Bear Stearns said on Monday that it received a Wells notice from the Securities and Exchange Commission, which said the agency investigators were prepared to recommend enforcement action against the company as part of a municipal-bond probe. The company said it was cooperating with the SEC and the Department of Justice.
The impact of sub prime crisis has been severest for Bear Stearns, an 84-year-old company that generates nearly one-sixth of its income from packaging and trading mortgage bonds. In last July, two of the company's hedge funds that had invested in mortgage securities failed, triggering a collapse of the sub-prime home loan market. The two funds later filed for bankruptcy protection and the assets of a third fund were frozen by Bear Stearns. On Friday, the company said its assets under management have shrunk 20% since last November.
On March 14, the stock of the struggling investment bank dropped 53% in morning trading after JP Morgan said that in conjunction with the Federal Reserve Bank of New York, it has agreed to provide a secured loan facility to Bear Stearns for an initial period of up to 28 days. Announcement of the bailout sent the shares of many other financial institutions also down and took the dollar to new lows. Two days later, on March 16, JPMorgan Chase, backed by the federal government, said it would acquire Bear Stearns for $236.2 million or $2.00 per share to avoid a bankruptcy. The purchase price was later increased to $10.00 per share.
Stock Movement
BSC closed Monday's regular trade at $10.11, down $0.11 or 1.08% from the previous close, on 14.54 million shares. In the extended session, the stock dropped two cents. For the past year, the stock has been trending in the range of $2.84-$159.36.
Posted Tuesday, April 15, 2008
SEC rebuffs lawmakers over Bear Stearns disclosure
23 Apr 2008
The Securities and Exchange Commission refused a congressional request to disclose why it dropped an investigation into whether Bear Stearns harmed investors by improperly valuing complex debt securities.
The US regulator cited confidentiality in its decision involving the late-stage probe of the Wall Street firm. At issue is a move by the SEC to abort an enforcement case into activities at Bear several months before the firm imploded last month.
Investigators including the SEC had pulled back from bringing two cases begun in 2005 against Bear Stearns involving collateralised debt obligations. In an April 2 letter, Senator Charles Grassley, ranking member of the Senate Finance Committee, requested information from the SEC into the circumstances surrounding the dropped case.
Replying to Grassley, SEC chairman Christopher Cox wrote in an April 16 letter: “The commission does not disclose the existence or non-existence of an investigation or information generated in any investigation unless made a matter of public record in proceedings brought before the Commission or the courts."
Posted Thursday, April 23, 2008
Hello, Alternative Universe
Junk and chumps, pump and dump, barbarians and brokers, smoke and mirrors and other assets of our risk-positive fiscal mess
By John Sakowicz
04.23.08
This is the first of a multipart series on the state of the economy and how we got here.
There is no glory on Wall Street. There is only greed. There are no good guys or bad guys. There are only winners and losers. In fact, there are only guys like Steve Schwarzman and Pete Peterson.
In 1984, Schwarzman and Peterson got crushed like a couple of grapes under the very chubby feet of a guy named Lew Glucksman. (Everything about Lew was chubby, not just his feet.) This happened at a place called Lehman Brothers, at that time a venerable Wall Street partnership. It was a classic power struggle, but no biggie in the whole scheme of things.
Schwarzman and Peterson bounced back quickly. In 1985, they started a new firm with a shared secretary and $400,000. Their new company was called the Blackstone Group, and it is the stuff of legend to say that fortune smiled on them. Schwarzman and Peterson are now two of the richest men in the world. Since 1985, they've done over $400 billion in deals. They are arguably the leading global alternative-asset managers in the world. What's more, they invented an entirely new financial world while they did it.
Problem is, we have to live in it.
Problem Swallowing
Problem is, there are lots of problems on Wall Street. For starters, we've seen the consolidation of power and the concentration of both capital and revenue in fewer and fewer hands. The few institutions left on Wall Street—and there about 10—are now like superstores or warehouses. And the story of how they came to dominate Wall Street is very much like the story of how Costco or Sam's Club came to push mom and pop retailers off the map.
I would know. I started my career at Alex Brown & Sons, the oldest investment bank in the country, established in 1800. A guy named A. B. "Buzzy" Krongard hired me. (Buzzy later turned out to be the No. 3 guy in the CIA.) Alas, in the decade of the 1990s, the proud people at Alex Brown got swallowed up by Bankers Trust, which in turn got swallowed up by Deutsche Bank. I also worked for Colonial Management Associates, which got swallowed up by Columbia Management Group, which got swallowed up by FleetBoston, which got swallowed up by Bank of America.
I worked on the floor of the NYSE for Spear, Leeds & Kellogg, which was swallowed up by Goldman Sachs. I worked for Dean Witter, which got swallowed up by Morgan Stanley. None of the firms I worked for were small companies, what we on Wall Street quaintly call "boutiques." I worked for big companies. Yet they've all been swallowed. All of them.
Now, the 10 or so institutions that dominate Wall Street are monopolies. We've also seen the reinvention of these very same companies on Wall Street. There is now no difference between a commercial bank and an investment bank, no difference between a lender and an adviser. There is now only the monolithic Merrill Lynch or the monolithic Citigroup. Capital is concentrated in these few firms. Naturally, so are revenues. But risk, too, is concentrated. This is a big problem. Because if every deal has got to be bigger and bigger to earn fatter and fatter rewards, then these few institutions must assume greater and greater risk. And risk management is what making money is all about.
Prime Junk Chumps
The Glass-Steagall Act, enacted during the Great Depression to prevent another stock market crash by separating commercial banking from investment banking, was repealed in 1999. In today's lineup of traders, deal makers, underwriters, lenders, advisers, market makers, portfolio managers, brokers and others, it is impossible to point to the chief suspect in the defrauding of America that is now being commonly called the "subprime crisis."
The traditional institutions of commercial banks and investment banks have given way to a new set called hedge funds, private equity funds, and other alternative asset managers. Emphasis on "alternative." Schwarzman and Peterson saw the trend; this was their genius. But there is little to no regulation of alternative-asset managers.
Which brings us to the next problem: There is little to no regulation of the alternative assets that these alternative-asset managers dream up and manage.
A lot of this stuff is debt—debt that is diced, spliced, altered, reheated, topped off with nuts, whipped cream and a cherry and then packaged and repackaged to the American investor. This debt is sold not directly to the little guy, the retail investor—you and me—but to the institutional investor who is presumably acting on our behalf through pension funds, insurance companies, mutual funds, endowments and others.
In the parlance of Wall Street, this debt is "securitized." Call this debt by any name, but don't call it secure. The popular names for this debt are collateralized mortgage obligations (CMOs) and collateralized debt obligations (CDOs), first widely heard last summer when the subprime market was blowing up. These CMOs and CDOs are spread across the spectrum of risk. Some are senior debt. Some are subordinated debt. Some are OK. The rest are junk. Junk as in subprime junk.
Guess who owns that debt now? You do. Through your pension plans, insurance policies, mutual funds, university and hospital endowments—you do, we do, I do.
And ever since the Federal Reserve Bank bailed out Bear Stearns, you now also own this debt as an American taxpayer. Yeah, chump, you. The losses—er, liabilities—were shifted to you.
There's more. The Fed now lends money—our taxpayer money—to all of Wall Street. The Fed lends not just to its member banks, like before the subprime mess, but it now also lends to all those reckless broker dealers out there, firms like Bear Stearns. The Fed lends your money to them through something that is called the "discount window."
And, man, is that money discounted! The Fed is giving it away. As of this writing, borrowing from the discount window hit something like $36.2 billion a day. A day.
Impossible Things
In Alice in Wonderland, the Queen says, "I believe in as many as six impossible things before breakfast."
Within the last decade, a thousand impossible things are dreamed up before dawn. Not only is there the packaging of new forms of debt, but the minting of new forms of money. Literally, new forms of money: they're called swaps and derivatives.
Swaps and derivatives trade like stocks and bonds, but most of them aren't registered securities like stocks or bonds. But swaps and derivatives aren't exactly Monopoly money, either. What are they? Ridiculously complex and esoteric. For the last decade, risk managers on Wall Street pulled their hair out, lost sleep and finally gave up trying to quantify the risk inherent in them. Yeah, they've given up. When it came to swaps and derivatives, even auditors couldn't find their ass with both hands.
And yet trillions of dollars in swaps and derivatives trade every single day in markets that didn't even exist a decade ago. For the most part, the biggest volume of swaps and derivatives don't even trade in a physical marketplace like the exchanges in New York or Chicago. The transactions are opaque because they are largely undertaken by private parties in electronic markets, most of them offshore.
Swaps and derivatives trade in a virtual market, a shadow market. A market that in the United States alone is estimated to be a $45.5 trillion market.
Here's the perspective: The size of the worldwide bond market is estimated at $45 trillion. The size of the worldwide stock market is estimated at $51 trillion. And the size of the worldwide swaps and derivatives market is estimated at $480 trillion in nominal or "face" value. That's 30 times the size of the entire U.S. economy and 12 times the size of the entire world economy.
Brokers & Barbarians
How is this possible? Advanced technologies make this market possible. Welcome to money's alternative universe. Alternative trading systems. Electronic communications networks. Central banks. Private banks. Brass plate banks. Russian Mafia banks in Cyprus. The Vatican's bank in the Cayman Islands. The Bush and bin Laden families holding hands and tip-toeing through the tulips in financial cyberspace. Digital barrels of oil in virtual supertankers in the Persian Gulf. Digital ounces of gold in virtual vaults in Switzerland. Digital bushels of corn in virtual silos in Iowa. Eurex. Euronext. The World Federation of Exchanges. A transnational community of anonymous traders who have never met and never will.
Merrill Lynch trading swaps and derivatives with Iran. Mullahs on the mainframe. Citigroup trading swaps and derivatives with Venezuela. Chavez on the craps table. UBS trading swaps and derivatives with almost anyone out there in the ethers—Christ, the anti-Christ—it doesn't matter to UBS. What matters is that traders keep liquidity coming out the yin-yang.
We've seen the emergence of a new master race on Wall Street who work hand in hand with the traders. They created this market of swaps and derivatives, and help traders manipulate this market through their own brand of highly sophisticated pump-and-dump schemes and do their damned best to keep this market secret and off the books. These are the prime brokers.
Not in keeping with their other brethren on Wall Street, either short-term traders or long-term bankers, prime brokers are the new barbarians at the gate. They augment the activities of the hedge-fund guys and private-equity guys—and then take the game to a whole other level.
Believe me when I say their interests are not aligned with your interests.
At press time, oil nears a record $117 a barrel. The dollar continues to fall. Our credit woes continue to worsen. The United States is deep in debt and still digging. We're all paying for the nation's debt addiction through both direct and indirect taxes. Our leaders, such as they are, are tracking the storm of inflation and the threat of the most serious recession since the Great Depression. Still think this doesn't have anything to do with you?
Next: Where has that Black Swan been hiding?
John Sakowicz is a Sonoma County investor who was a cofounder of a multibillion-dollar offshore hedge fund, Battle Mountain Research Group. He was assisted in research by Arianna Carisella.
Posted Monday, April 28, 2008
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